{Whitepaper} The Rationality Test

Debunking private equity pricing and value creation


Recent quarters have been bumpy for the public and private capital markets. One thing that almost all investors prioritize is to review their portfolios thoroughly and challenge their understanding of the current market. As a result, we have collaborated with investment management solution provider Qontigo to study the private market situation in North America.

We combined premium data from public and private markets to calibrate correlations between public risk factors and private market performance and form forecasts. We projected the expected return of the asset class up to December 2022 from the historical cash flows up to June 2022. And also compared the pricing multiples of private companies in our CEPRES ecosystem with those of the S&P 500.

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Are current private pricing multiples too high?

One common question is, “Are private equity company EV/EBITDA multiples too high?” To study this one, we approached it from two perspectives. First, are private company pricing multiples significantly higher than public companies? Second, do private equity fund managers deliberately overstate their interim valuations to inflate the pricing multiples.

A naive comparison in Figure 2 between pricing multiples of private companies in our CEPRES universe and those of the S&P 500 does not suggest a noticeable gap. We could eliminate potential inflations in appraised valuation numbers by aggregating cash-based pricing multiples from 1.429 North American buyout companies (pricing at either entry or exit). In general, the private multiples are in line with the public in terms of range and trend.


Appraisal valuation inflation

Many investors ask whether fund managers overstate the appraisal valuation numbers to inflate interim performance metrics. We took 265 deals exited after 2017 to study the difference between the ultimate exit pricing multiple and prior interim ones (Exit Multiple – Interim Multiple).

Download the full white paper to understand correlations between public risk factors and private market performance